Indonesia Unexpectedly Raises Key Rate to Highest Since 2009

Indonesia’s central bank unexpectedly raised its benchmark interest rate as policy makers intensify efforts to narrow a current-account deficit that has weighed on the rupiah.

Governor Agus Martowardojo and his board increased the reference rate by 25 basis points to 7.5 percent, the central bank said in Jakarta today. Only one out of 25 economists surveyed by Bloomberg News predicted a 25-basis point increase, with the rest expecting no change. The deposit facility rate was raised to 5.75 percent from 5.5 percent.

Indonesian officials are grappling with a depreciated exchange rate, elevated inflation and diminished foreign capital inflows undermining President Susilo Bambang Yudhoyono’s legacy of economic stability before he steps down next year. With today’s move, the central bank has raised its key rate by 1.75 percentage points since early June to shore up the rupiah and stem price gains, while the government predicts growth next year will be slower as it reins in spending to narrow a record current-account gap.

“Recent trade data shows that the improvement of the current-account may not be very swift,” Helmi Arman, a Jakarta-based economist at Citigroup Inc., said before the decision. “Stabilization or tightening policies are still warranted.”

The rupiah was little changed at 11,559 as of 2:48 p.m. in Jakarta, prices compiled by Bloomberg from local banks show. It has declined more than 17 percent this year, the worst performance among 11 major Asian currencies tracked by Bloomberg.

Slowing Growth

GDP increased 5.62 percent in the three months ended Sept. 30 from a year earlier, after climbing 5.83 percent in the second quarter, the government said Nov. 6. Bank Indonesia cut its 2013 economic growth forecast last month to between 5.5 percent and 5.9 percent, from as much as 6.2 percent earlier.

Inflation remained above 8 percent for a fourth month in October.

The current-account shortfall was a record 4.4 percent of GDP in the three months through June, and Martowardojo has said it may have narrowed to about 3.3 percent to 3.5 percent of GDP last quarter. Bank Indonesia will release the third-quarter figures tomorrow.

Narrowing the deficit is the number one priority for Indonesia, and the government is planning a policy package this month to help the balance of payments, Finance Minister Chatib Basri said Nov. 7.

“Policy tightening is needed to control inflation and solve the current-account deficit problem,” Nouriel Roubini, a professor of economics at New York University, said in Jakarta yesterday. “Currency depreciation is necessary to curb the external deficit.”

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editor responsible for this story: Shamim Adam at sadam2@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.